Chris owed money to the IRS, and had federal tax liens filed against him. He was also a 1/3 beneficiary of his mother’s estate.
To avoid the IRS collecting against his share of the estate, Chris disclaimed his interest as a beneficiary. Because Kentucky's disclaimer statute creates a legal fiction that the disclaimant pre-deceased the decedent, which relates back to the date of the decedent's death, it was argued that a disclaiming taxpayer would not have an interest in the subject property under Kentucky law.
Unfortunately for Chris, the U.S. Supreme Court had already resolved this case in Drye v. U.S., 528 US 49 (1999), holding that the IRS could reach disclaimed assets. The analysis progresses as follows:
a. Code Section 6321 authorizes the IRS to satisfy a tax deficiency by imposing a lien on “all property and rights to property, whether real or personal, belonging to [the taxpayer].”
b. What constitutes “property and rights to property” is ultimately a question of federal law. U.S. v. Craft, 535 US 274 (2002).
c. However, the lien statute creates no property rights but merely attaches consequences to rights under state law.
d. Thus, the court should look initially to state law to determine what rights the taxpayer has in the property the IRS seeks to reach, and then apply federal law to determine whether such state rights qualify as property or rights to property under federal law.
e. Since a potential disclaimant inevitably exercises dominion over the property simply by determining whether the subject property will remain with him or pass to known other, the disclaimer statute gives the taxpayer the power to channel the estate's assets. Therefore, the taxpayer retained some rights in the property under state law, despite the disclaimer.
f. Such state law property rights are sufficient to create “property” or “rights to property” under federal law for the purposes of Code Section 6321.